Global Market Comments
May 1, 2018
Fiat Lux
Featured Trade:
(FRIDAY, JUNE 15, 2018, DENVER, CO, GLOBAL STRATEGY LUNCHEON)
(ANATOMY OF A GREAT TRADE)
(TLT), (TBT), (SPY), (GLD), (USO),
(CYBERSECURITY IS ONLY JUST GETTING STARTED),
(PANW), (HACK), (FEYE), (CSCO), (FTNT), (JNPR), (CIBR)
Global Market Comments
April 16, 2018
Fiat Lux
Featured Trade:
(THE MARKET OUTLOOK FOR THE WEEK AHEAD, or THE WEEK THAT NOTHING HAPPENED),
(TLT), (GLD), (SPY), (QQQ), (USO), (UUP),
(VXX), (GOOGL), (JPM), (AAPL),
(HOW TO HANDLE THE FRIDAY, APRIL 20 OPTIONS EXPIRATION), (TLT), (VXX), (GOOGL), (JPM)
Global Market Comments
March 27, 2018
Fiat Lux
Featured Trade:
(DON'T MISS THE MARCH 28 GLOBAL STRATEGY WEBINAR),
(TEN MORE UGLY MESSAGES FROM THE BOND MARKET),
(TLT), (TBT), (USO), (GLD), (GS), (SPY)
(FRIENDS WHO WILL EXECUTE MY TRADE ALERTS FOR YOU)
A reader emailed me yesterday to tell me that while visiting his daughter at a college in North Carolina, he refilled his rental car with gas for $1.39 a gallon.
So I got the idea that something really big is going on here that no one is yet seeing. I processed the possibilities in my snowshoe up to the 10,000-foot level above Lake Tahoe last night.
By the way, the view of the snow covered High Sierras under the moonlight was incredible.
For decades, I have dismissed the hopes of my environmentalist friends that alternatives will soon replace oil (USO) as our principal source of energy.
I have long agreed with the views of my fracking buddies in the Texas Barnett Shale that it will be decades before wind, solar, and biodiesel make any appreciable dent in our energy makeup.
It took 150 years to build our energy infrastructure, and you don?t replace that overnight. The current weakness in oil prices is a simple repeat of a predictable cycle that has continued for a century and a half. In a couple years, Texas tea will be posting triple digits once again.
I always thought that oil had one more super spike left in it. After that, it will fade into history, reduced to limited applications, like making plastics and asphalt, probably sometime in the 2030?s.
The price for a barrel of oil should then vaporize to $5.
But given the price action for energy and all other commodities I?m starting to wonder if this time I?m wrong.
I have watched with utter amazement while Freeport McMoRan (FCX) plunged from $38 to $3. I was gob smacked to see Linn Energy (LINE), admittedly a leveraged play, crater from $32 to 30 cents.
And I was totally befuddled to see gas major Chesapeake Energy (CHK) implode from $65 to $1.
Has the world gone mad?
When the data don?t match your view, it?s time to change your view.
Maybe there won?t be another spike in oil prices. Could its disappearance from the modern industrialized economy have already begun?
That would certainly explain a lot of the recent eye-popping price action in the markets. In five short years oil has dropped 82%. It did this while global GDP grew by 20% and auto sales, and therefore gasoline demand, has been booming.
Of course, you could just call all of this a big giant reversion to the mean.
Over the past 150 years, the average, inflation adjusted price of oil has been $35 a barrel. The price for gasoline has been $2.25 a gallon, exactly where it was in 1932, and where it now is in much of the country.
I know all of these numbers because I once did a study to see if oil prices are rigged (conclusion: they are). How can the price of a commodity stay the same for 150 years?
Wait, the naysayers announce. Things don?t happen that fast.
But they do, my friends, they do, especially in energy.
Until 1849, my ancestors were the largest producers of whale oil on Nantucket Island. (Our family name,? Coffin, was mentioned in ?Moby Dick? seven times, and was a focus of the just released film, ?In the Heart of the Sea.?)
Then this stuff called petroleum came along, wrested from the ground with new technology by men like Drake and Rockefeller. The whale oil market crashed, dropping in price by 90%, and virtually disappeared in two years.
My relatives were wiped out and moved to San Francisco, which they already knew from their whaling days, and where gold had just been found.
A half-century later, this thing called an ?automobile? came along meant to replace the ubiquitous horse and buggy. People laughed. It was loud, noisy, smelly, inefficient, and expensive. Only the rich could afford them.
You had to go to a drug store to buy high priced fuel in one-gallon tins. And it scared the horses. England passed a national automobile speed limit of 5 miles per hour, as cars were considered dangerous.
Then huge oil discoveries were made in Texas and California (watch ?There Will Be Blood?), the Hughes drill bit came along, and gasoline prices fell sharply. Suddenly cars were everywhere. The horse population declined from 100 million to only 1 million today.
All of this is a long-winded, history packed way of saving ?This time it may be different?.
I have on my desktop a Trade Alert already written up to buy the (USO) May, 2016 $9 calls. Today, they traded at $1.00. I?m just waiting for another melt down in oil to take a low risk punt on the long side.
If we rocket back up to $100, as many are predicting, these calls will be worth a fortune. But you know what, oil may only peak out at $44 this time. The trade will still make money, but not as much as in past cycles.
So, you better think hard about loading up on too many oil stocks at these distressed levels. Look what has already happened to the coal industry (KOL), which has essentially gone bankrupt.
You could well be buying into the buggy whip industry circa 1900.
There?s Got to Be a Better Way to Make a Living
Those of a certain age can?t help but remember that things for the US went to hell in a hand basket after 1963.
That?s when President John F. Kennedy was assassinated, heralding decades of turmoil. Race riots exploded everywhere. The Vietnam War ramped up out of control, taking 60,000 lives, and destroying the nation?s finances. Nixon took the US off the gold standard.
When people complain about our challenges now, I laugh to my self and think this is nothing compared to that unfortunate decade.
Two oil shocks and hyper inflation followed. We reached a low point when Revolutionary Guards seized American hostages in Tehran in 1979.
We received a respite after 1982 with the rollback of a century?s worth of regulation during the Reagan years. But a borrowing binge sent the national debt soaring, from $1 trillion to $18 trillion. An 18-year bull market in stocks ensued. The United States share of global GDP continued to fade.
Basking in the decisive victories of WWII, the Greatest Generation saw their country account for 50% of global GDP, the largest in history, except, perhaps, for the Roman Empire. After that, our share of global business activity began a long steady decline. Today, we are hovering around 22%.
Hitch hiking around Europe in 1968 and 1969 with a backpack and a dog-eared copy of Europe on $5 a Day, I traded in a dollar for five French francs, four Deutschmarks, three Swiss francs, and 0.40 British pounds.
When I first landed in Japan in 1974, there were Y305 yen to the dollar. Even after a strong year, the greenback is still down by 75% against these currencies, except for sterling. How things have changed.
We now live in a world where the US suddenly has the strongest economy, currency and stock market in the world. Are these leading indicators of better things to come?
Is the Great American Rot finally ending? Is everything that has gone wrong with the United States over the past half century reversing?
The national finances are hinting as much. Over the last four years, the federal budget deficit has been shrinking at the fastest rate in history, from $1.4 trillion to only $483 million.
If the economy continues to grow at its present modest 2.5% rate, we should be in balance by 2018. Then the national debt, which will peak at around $18 trillion, will start to shrink for the first time in 20 years.
And since chronic deflation has crashed borrowing costs precipitously, the cost of maintaining this debt has dramatically declined.
A country with high economic growth, no inflation, generationally low energy costs, a strong currency, overwhelming technology superiority, a strong military and political stability is always a fantastic investment opportunity.
It certainly is compared to the highly deflationary, weak currency, technologically lagging major economies abroad.
You spend a lifetime looking for these as a researcher, and only come up with a handful. Perhaps this is what financial markets have been trying to tell us all along.
It certainly is what foreign investors have been telling us for years, who have been moving capital into the US as fast as they can (click here for ?The New Offshore Center: America?).
It gets even better. These ideal conditions are only the lead up to my roaring twenties scenario (click here for ?Get Ready for the Coming Golden Age?), when over saving, under consuming baby boomers enter a mass extinction, and a gale force demographic headwind veers to a tailwind.
That opens the way for the country to return to a consistent 4% GDP growth, with modest inflation and higher interest rates.
Which leads us all to the great screaming question of the moment: Why is the US stock market trading so poorly this year? If the long term prospects for companies are so great, why have shares suddenly started performing feebly?
Not only has it gone nowhere for three months, market volatility has doubled, making life for all of us dull, mean and brutish.
There are a few short-term answers to this conundrum.
There is no doubt that the Euro and the yen have fallen so sharply against the greenback that it is hurting the earnings of multinationals when translated back to dollars.
This has cut S&P 500 earnings forecasts for the year. And these days, everyone is a multinational, including the Diary of a Mad Hedge Fund Trader, where one third of our subscribers live abroad.
Another short-term factor is the complete collapse of the price of oil. Again, it happened so fast, and was so unexpected, that it too is having a sudden deleterious influence of broader S&P earnings.
Go no further than oil giant Chevron, which just announced a big drop in earnings and a massive cut in its capital spending budget for 2016.
The final nail in the Q4 coffin has been bank earnings, which all took big hits in trading revenues. Virtually all were taken short by the huge, one-way rally in bond prices in recent months and the collapse of interest rates.
This happens when panicky customers come in and lift the banks? inventories, and trading desks have to spend the rest of the day, week and month trying to get them back at a loss.
I have seen this happen too many times. This is why the industry always trades at such low multiples.
With no leadership from the biggest sectors of the market, financials and energy, and with the horsemen of technology and biotech vastly overbought, it doesn?t leave the nimble stock picker with too many choices.
The end result is a stock market that goes nowhere, but with a lot of volatility. Sound familiar?
Fortunately, there is a happy ending to this story. Eventually, all of the short-term factors will disappear. Oil prices and bond yields will go back up. The dollar will moderate. Corporate earnings growth will return to the 10% neighborhood. And stocks will reach new highs.
But it could take a while to digest all of this. This is a lot of red meat to take in all at one time. If the market grinds sideways in a 15% range all year, and then breaks out to the upside once again for a 5% annual gain, most investors would consider this a win.
Once again, index investors will beat the pants off of hedge fund managers, as they have for the past seven years.
In the meantime, I doubt the stock indexes will drop more than 6% % from here, with the (SPY) at $189, and we have already seen a 6% hair cut from last year?s peak.?
Knock a tenth off a 16.5 X forward earnings multiple with zero inflation, cheap energy, ultra low interest rates and hyper accelerating technology, and all of a sudden, stocks look pretty cheap again.
As the super sleuth, Sherlock Homes used to say, ?When you have eliminated the impossible, whatever remains, however improbable, must be the truth?.
It?s All Elementary
There is no better sight to a hungry trader than blood in the water.
?Buy them when they?re cryin? is an excellent investment strategy that always seems to work.
There are rivers of tears being shed over the banking industry right now.
Federal Reserve officials openly told investors that after the December ?% rate hike that they would continue to do so on a quarterly basis. Only weeks later, a collapse in the stock market shattered this scenario to smithereens.
I doubt we?ll see any more Fed action in 2016.
This caught investors in bank shares wrong footed in a major way.
But wait! It gets worse!
Among the largest holders of American bank shares are the Persian Gulf sovereign wealth funds, including those for Saudi Arabia, Kuwait, Oman, Qatar, and the United Arab Emirates, my old stomping grounds. Pieces of me are still there.
The collapse in oil prices (USO) has put their budgets in tatters and they now have to sell stock to fund wildly generous social service programs. The farther Texas tea drops, the more shares they have to sell, and at $26 a barrel they have to sell bucket loads.
Had enough? There?s more.
The junk bond market (JNK) and oil company shares are suggesting that up to half of all American oil companies will go bankrupt sometime this year, mostly small ones. It all depends on how long oil stays under $40.
Unfortunately, the oil industry has been the most prolific borrower from banks for the last decade. The covenants on many of these loans require borrowers to pump and sell oil to meet interest payments NO MATTER THE PRICE! It?s a perfect formula for maxing out production and selling into a hole.
So fear of widespread energy defaults has also been dragging down bank shares as well.
Some of the moves so far in this short year have been absolutely eye popping. Bank of America (BAC) has plunged 31% from its recent high, while Citibank (C) is down 32% and JP Morgan is off 19%. Basically, they all had a terrible year just in the month of January.
Bank shares have been beaten so mercilessly that they are approaching levels last seen at the nadir of the 2009 financial crisis.
Except that this time, there is no financial crisis, not even the hint of one. For the past seven years, banks have been relentlessly raising capital, reducing leverage, and growing BIGGER.
They proved last time that they were too big to fail. Now they are REALLY too big to fail. Default rates aren?t even a fraction of what we saw during the bad old days. Energy industry borrowing is only a tenth the size of bank home loan portfolios going into the crisis.
Blame the Dodd-Frank financial regulation bill, which requires banks to hold far more capital In US Treasury bonds (TLT) than in the past, which by the way, are doing spectacularly well.
Blame ultra cautious management.
Whatever the reason, Big US banks are now solid as the Rock of Gibraltar.
Which means I?m starting to get interested. Interest rates don?t go down forever, nor does the price of oil. And scares about loan defaults are being wildly exaggerated by the media, as always.
But there is more than one way to skin a cat.
All of these companies issue high yield preferred stock with exceptionally high dividends. For example, Bank of America issued 6.2% yielding paper as recently as October. It is paying something like 8% now.
Since these securities are stock, you get to participate in price appreciation when the panic subsides. A guaranteed 8% return, plus the prospect of substantial capital appreciation? Sounds like a pretty good deal to me.
Google bank preferred shares and you will find an entire world out there of specialist advisors, dedicated newsletters and even day trading and hedging recommendations.
One thing to keep in mind here is that you should only buy ?non callable? paper. This prevents issuers from stealing your paper when better times return to cut their interest payouts.
There is another way to play this beleaguered sector.
You can buy the iShares S&P US Preferred Stock Index Fund ETF (PFF), which owns a basket of preferred stocks almost entirely made up of bank shares. As of today it was yielding 5.62%. To visit the fund?s website, please click link: https://www.ishares.com/us/products/239826/ishares-us-preferred-stock-etf.
Time to BUY?
There are very few people I will drop everything to listen to.
One of the handful is Daniel Yergin, the bookish founder and CEO of Cambridge Energy Research Associates, the must-go-to source for all things energy.
Daniel received a Pulitzer Prize for The Prize: The Epic Quest for Oil, Money, and Power, a rare feat for a non-fiction book (I?ve never been able to get one).
Suffice it to say that every professional in the oil industry, and not a few hedge fund traders, have devoured this riveting book and based their investment decisions upon it.
Yergin thinks that the fracking and horizontal drilling revolutions have made the United States the new swing producer of oil. There is so much money in the investment pipeline that American oil production will continue to increase for the next six months, by some 500,000 barrels a day.
Much of this oil is coming from heavily leveraged, thinly capitalized producers whose bankers won?t let them cut back a drop on production so they can maintain interest payments on their debt.
This new supply will run head on into the seasonal drop in demand for energy, when spring ritually reduces heating bills, but the need for air-conditioning has not yet kicked in.
The net net could be a further drop in the price for Texas tea from the present $31 a barrel, possibly a dramatic one into the teens.
Yergin isn?t predicting any specific oil price as a potential floor, as it is an impossible task. While OPEC was a monolithic cartel, the US fracking industry is made up of thousands of mom and pop operators, and no one knows what anyone else is doing.
However, he is willing to bet that the price of oil will be higher in a year.
Currently, the 96 million barrel global market for oil is oversupplied with 2 million barrels a day.
If the International Monetary Fund is right, and the world adds 3.0% in economic growth this year, we will soak up 1 million b/d of that with new demand.
In the end, the oil price collapse is a self-solving problem. The new economic growth engendered by ultra low fuel prices eventually drives prices higher.
Where we reach the tipping point, and the oil market comes back into balance, is anyone?s guess. But when it does, prices will go substantially higher. The cure for low prices is low prices.
This is why I listed energy as the top performing asset class this year (click here for my ?2016 Annual Asset Class Review? by clicking here.
The bottom line is that there will be a great time to buy oil companies, but it is not yet.
What we are witnessing now is the worst energy crash since the 1980?s, when new supplies from the North Sea, Mexico and Alaska all hit at the same time.
I remember the last time oil plunged to $8 a barrel, because Morgan Stanley then set up a private partnership that bought commercial real estate in Houston for ten cents on the dollar. The eventual return on this fund was over 1,000%.
This time it is more complicated. Prices lived over $100 for so long that it sucked in an unprecedented amount of capital into new drilling, some $100 billion worth.
As a result, sources were brought online from parts of the world as diverse as Russia, the Arctic, Central Asia, Africa, the Canadian tar sands and remote and very expensive offshore platforms.
Yergin believes that Saudi Arabia can survive for three years with prices at current levels. After that, it will burn through its $150 billion of foreign exchange reserves, and could face a crisis.
Clearly, the Kingdom is betting that prices will recover with its market share based strategy before then. They are playing for the long haul.
The transition of power to the new King Salman was engineered by a committee of senior family members, and has been very orderly.
However, King Salman, a Sunni, will have his hands full. The current takeover of Yemen by a hostile Shiite minority, the Houthis, is a major concern. Yemen shares a 1,100 mile border with Saudi Arabia.
Daniel says that a year ago, there was a lot of geopolitical risk priced into oil, with multiple crises in the Ukraine, Syria, Libya and Iraq frightening consumers, so trading levitated over $100 for years. Delta Airlines, Inc. (DAL) even went to the length of buying its own refiner to keep fuel prices from rising further.
US oil producers have a unique advantage over competitors in that they can cut costs faster than any other competitors in the world. On the other hand, they are eventually going head to head against the Saudis, whose average cost of production is a mere $5/barrel.
A native of my own hometown of Los Angeles, Yergin started his professional career as a lecturer at Harvard University. He founded Cambridge Energy in 1982 with a $7.00 investment in a file cabinet at the Good Will. He later sold Cambridge Energy to the consulting group IHS Inc. for a small fortune.
To buy The Prize at discount Amazon pricing, please click here.
I did not buy the rally in stocks this week for two seconds.
Once the S&P 500 (SPY) bounced off of the $190 level the first time, it was only a question of how soon to sell again. When I said ?Sell every rally in stocks this year,? I wasn?t kidding.
As it turns out, I caught the absolutely top tick in the (SPY) at $195.
That?s where I quickly bought the (SPY) February $202-$207 vertical bear put debit spread. Within hours, the index cratered an awesome $70 handles, and I was already looking at 70% of the maximum potential profit.
The great luxury of the S&P 500 SPDR?s (SPY) February, 2016 $202-$207 in-the-money vertical bear put spread is that it allows you to cash in on continued extremely elevated levels of the Volatility Index (VIX).
This is why the potential return is so high for a front month options spread already 7 handles, and now 12 handles in-the-money.
In the meantime, I continued to run big shorts in the (SPY) with my February 187 and $190 puts.
This was on the heels of cutting by half my (XIV) position at cost, and taking profits on my (SPY) January $182-$187 vertical bull call debit spread during the rally.
Since yesterday, I have cut the net exposure of my sizeable trading book from 40% to 0%. This is how you do it.
My lack of faith in this market can be measured by the bucket load.
I believe that oil (USO) hasn?t bottomed yet.
All we are seeing here is a round of natural short covering you would expect as the price bounces off the big round number of $30, something which computer driven algorithms love to do.
There are many more visits to the $20 handle for oil to come. Brent is already there.
If you have some magical insight into the price of oil, better than the entire industry combined, and are convinced that Texas tea bottomed yesterday, then you shouldn?t touch the S&P 500 SPDR?s (SPY) February, 2016 $202-$207 in-the-money vertical bear put spread. In that unlikely scenario, stocks rocket from here.
Then there?s China (FXI), whose continued turmoil will bring further US stock losses. I assure you, not even the Chinese know what?s going on in China. They are more like the unfortunate deer that is frozen in the headlights.
If the stock markets of the Middle Kingdom were either up or down 10% tomorrow, I wouldn?t be surprised.
I?m quite happy with the performance of the Trade Alert service so far in 2016.
Here we are only 8 trading days into the New Year and many traders have already blown up, including quite a few trade mentoring newsletters. We should be hauling in some big numbers in January and February.
This is how you trade a crash. Watch and learn. The opportunities are legion.
I firmly believe that simple solutions to our energy problems are in the process of coming out of the blue, and are something no one is thinking about now.
Add up the contributions of many small improvements, and the cumulative change will alter our economic future beyond all recognition. Here are two of them.
General Electric (GE) is now mass-producing their ?Smart Energy LED Bulb,? which can screw into a conventional socket and produce the same amount of light as a 60-watt bulb, but consume only nine watts of power.
Some 22% of America?s electric power supply is used for lighting, and this bulb could cut our total consumption by 17.6%.
Other bulb manufacturers are getting into the game, like Philips, Osram, Toshiba, and Panasonic, which are already offering more efficient designs. The downside is that, while they last 25,000 hours, or ten times longer than a conventional incandescent bulb, they will initially cost $15-$25.
Economies of scale are expected to bring costs down dramatically in a few years. The Department of Energy has selected Seattle as the test bed for an all LED (light emitting diode) public lighting system.
Here is another game changer for our energy woes. If you double conventional car engine efficiency, US oil consumption drops by half. This is not so hard to do. The US government has already mandated that US car makers achieve an average fleet mileage of 54.5 miles per gallon by 2025.
They are hoping this will lower the cost of gasoline to $1 a gallon by then. They may get their wish this year instead.
One of the first things you learn in a freshman level physics class is how inefficient an internal combustion engine is, using hundreds of moving parts operating at 500 degrees to convert only 25% of the energy input into to motion.?
Tesla?s (TSLA) entire electric drive train has just 11 moving parts, operate at room temperature, and convert 80% of its energy into motion. When they go to the mass market in two years with the $35,000 Tesla 3, it will have a huge impact on our overall energy picture
Add this in with the surging supplies of American shale oil, and the utter collapse of the price of Texas tea (USO) over the past six months is suddenly starts to make incredible sense.
After the market closes every night, I usually don a 60 pound backpack and climb the 2,000 foot mountain in my back yard.
To pass the time, I listen to audio books on financial and historical topics, about 200 a year (I?ve really got President Grover Cleveland nailed!). That?s if the howling packs of coyotes don?t bother me too much.
I also engage in mental calisthenics, engaging in complex mathematical calculations. How many grains of sand would you have to pile up to reach from the earth to the moon? How many matchsticks to circle the earth?
For last night?s exercise, I decided to quantify the impact of last year?s oil price crash on the global economy.
The world is currently consuming about 92 million barrels a day of Texas tea, or 33.6 billion barrels a year. In May, 2014 at the $107.50 high, that much oil cost $3.6 trillion. At today?s $32 intraday low you could buy that quantity of oil for a bargain $1 trillion.
Buy a barrel of crude, and you get three for free!
This means that $2.6 trillion has suddenly been taken out of the pockets of oil producers, and put into the pockets of oil consumers, i.e. you and me. Over the medium term, this is fantastic news for oil consumers. But for the short term, things could get very scary.
$2.6 trillion is a lot of money. If you had that amount of hundred dollar bills, it would rise to 250 million inches, 21 million feet, or 3,976 miles, or 1.2% of the way to the moon (another mental exercise). Tip this pile on its side, and you?d have a distance nearly equal to a round trip from San Francisco to New York.
The global financial system cannot move this amount of money around on short notice without causing some pretty severe disruptions. Expect a lot of bodies to float to the surface in 2016.
For a start, there is suddenly a lot less demand for dollars with which to buy oil. This has triggered short covering rallies in the long beleaguered Japanese Yen (FXY) and the Euro (FXE), which are just now backing off of long downtrends.
The fundamentals for these currencies are still dire. But the short-term trend now appears to be an upward one. The yen is tickling a one-year high against the buck as we speak.
The US Federal Reserve certainly sees the oil crash as an enormously deflationary event. The use of energy is so widespread that it feeds into the cost of everything. That firmly takes the chance of any interest rate rise off the table for the rest of 2016. The Treasury bond market (TLT) has figured this out and launched on a monster rally, as have muni bonds (MUB).
Traders are also afraid that the disinflationary disease will spread, so they have been taking down the price of virtually all other hard commodities as well, like coal (KOL), iron ore (BHP), and copper (CU). For more depth on this, see my piece on ?The End of the Commodity Super Cycle? by clicking here.
The precipitous fall in energy investments everywhere will be felt principally in the 15 US states involved in energy production (Texas, Oklahoma, Louisiana, North Dakota. Etc.). So, the consumers in the other 35 states should be thrilled.
However, the plunge in energy stocks is getting so severe, that it is dragging down everything else with it. ALL shares are effectively oil shares right now. In fact, all asset classes are now moving tic for tic with the price of oil. That effectively makes all of you oil traders.
Throw on top of that the systemic risk presented by the ongoing collapse of the Russian economy. The Ruble has now fallen a staggering 70% in 18 months, and there is panic buying of everything going on in Moscow stores.
The means that the dollar denominated debt owed by local firms has just risen by 300%. Any foreign banks holding this debt are now probably regretting ever watching the film, Dr. Zhivago.
Russian interest rates there were just skyrocketed. The Russian stock market (RSX) is the world?s worst performing bourse. How do you spell ?depression? in the Cyrillic alphabet?
And guess what the new Russian currency is?
IPhone 6.0?s, of which Apple is now totally sold out in Alexander Putin?s domain!
Thankfully, this is more of a European, than an American problem. But nobody likes systemic risks, especially going into New Year trading. It?s a classic case of being careful what you wish for.
Of the $2.6 trillion today, about $650 billion is shifting between American pockets. That amounts to a hefty 3.3% of GDP. Tell me this won?t become a big political issue in the 2016 presidential election.
Money spent on oil is burned. However, money spent by newly enriched consumers has a multiplier effect. Spend a dollar at Walmart, and the company has to hire more workers, who then have more money to spend, and so on.
So a shifting of funds of this magnitude will probably add 1.5% to U.S. economic growth this year.
Ultimately, cheap energy as far as the eye can see is a key element of my ?Golden Age? scenario for the 2020?s (click here for ?Get Ready for the Coming Golden Age?).
But you may have to get there by riding a roller coaster first.
Oil at $32?